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Cross-border conversion of companies

Cross-border conversion of companies

Growing internationalisation has increased the demand for companies to move. There have been many developments in relation to this in Europe over the past years.

Pursuant to Article 2:18 of the Dutch Civil Code, a Dutch legal entity can convert into a different legal form if certain requirements are taken into account. Book 2 of the Dutch Civil Code still does not provide for the cross-border conversion of companies, however. Nor is there a statutory regulation for this on the European level. Nonetheless, this kind of conversion is possible.

Cross-border conversion means that the company’s legal form and nationality (the law that applies to the company) change, but the company continues to exist and retains its legal personality. The conversion of a Dutch legal entity into a foreign legal entity is also referred to as an outbound conversion while the reverse is referred to as an inbound conversion.

The Member States of the EU/EEA use various starting points when determining the law that applies to a company. Some Member States apply what is called the internal affairs doctrine and other Member States apply the actual registered office doctrine. The internal affairs doctrine entails that a legal entity is always subject to the law of the Member State where it was incorporated and has its registered office. The Netherlands applies this doctrine; a Dutch legal entity must have its registered office in the Netherlands and must have been incorporated in the Netherlands.

According to the actual registered office doctrine, a legal entity is subject to the law of the state where it has its management board or principal place of business.

Because of these theories, confusion can arise over whether transfer of registered office is possible. For this reason, questions concerning this have been submitted to the Court of Justice of the EC/EU over the past few years.

The Court of Justice of the EC/EU has given various decisions on cross-border conversion. The freedom of establishment as set down in articles 49 and 54 of the Treaty on the Functioning of the European Union (TFEU) was a factor in these.

On 16 December 2008 the Court of Justice of the EC handed down a decision in the Cartesio case (case C-210/06). This decision stipulated that Member States are not required to permit the cross-border transfer of registered office of a company incorporated under their own law. It was pointed out here, however, that the transfer of registered office must be recognised if, afterthe transfer of registered office, the company can be converted into a local legal form in the new home state, provided there are no urgent reasons of public interest to oppose this. Urgent reasons of public interest could include the interests of creditors, minority shareholders, employees or the tax authorities, for instance.

On 12 July 2012 the Court of Justice of the EU ruled in the so-called Vale case (case C-378/10) that a Member State of the EU/EEA cannot prevent an inbound cross-border conversion. According to the Court, articles 49 and 54 TFEU mean that if a Member State has a regulation for internal conversions, this regulation also applies for cross-border situations. So a cross-border conversion may not be treated differently from a domestic conversion. An exception is provided here too, as with the Cartesio case, if there are urgent reasons of public interest.

Based on this case law, therefore, both outbound and inbound conversion is possible in the Member States of the EU/EEA.

The Dutch civil-law notary is increasingly being confronted with requests for cross-border conversions.

There is no Dutch statutory regulation for this, but this need not be an obstacle to the notarial execution of the conversion.

In the absence of a statutory regulation, the procedures that must be followed in the inbound and in the outbound Member State must be carefully examined. These procedures may vary from Member State to Member State.

The interests of creditors, minority shareholders, employees and the tax authorities must also be taken into consideration. The company to be converted must perform an economic activity.

In 2012 the Company Law Commission made a proposal for a statutory regulation for this in the Netherlands. In spring 2014 in a follow-up to this, an official preliminary draft concerning the cross-border conversion was provided online for public consultation purposes. The preliminary draft pertains to the cross-border conversion of an NV/BV into a company governed by the law of a different EU/EEA Member State and the cross-border conversion of an NV/BV into a company governed by the law of the public bodies of Bonaire, Sint Eustatius or Saba and vice versa. The scope of the preliminary draft is therefore limited; it does not pertain to the conversion of legal forms other than BVs or NVs and also does not contain any rules for conversion to and from countries outside the EU/EEA.

On the European level, a statutory guideline would certainly be important for the procedures that must be followed. Most of the EU Member States still do not have a regulation for cross-border conversion. Harmonisation of the rules could present a solution for this problem.

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